SINGAPORE - Some market pundits are now suggesting holding gold as an investment because they are worried that something bad may happen in the financial markets.

They are not exactly sure how this gloom and doom scenario might come about, but they certainly have plenty of worries to occupy them.

So far, this year has been full of nasty surprises. Just to name a few of the more prominent ones, there is Brexit, oil hitting a low of US$26 a barrel in January, a Turkish military coup, multiple terror attacks in Europe, wild swings in the Shanghai stock market and a big devaluation of the Chinese yuan.

Then there is the increasingly poisonous political landscape in the United States where two not exactly popular contenders - Hillary Clinton and Donald Trump - will slug it out over the next three months for the US presidency.

Yet, stock markets around the world have somehow managed to survive all of these nasty surprises. In fact, Wall Street even hit record high levels in the past two weeks. This despite the tepid results so far released by US companies over the same period.

The flipside, however, is that there are many investors who are not cheering the current stock rally. Despite hitting all-time highs, Wall Street is barely up on the year and stock turnover has shrunk considerably.

This phenomenon has occurred in other markets as well. The benchmark Straits Times Index is positive for the year. But since recovering from the sell-down triggered by Brexit, it has moved within a tight range. Daily turnover on some days has fallen below the psychologically important S$1 billion mark.

Instead, these investors have been channelling their money into bonds depressing bond yield levels to historic low levels.

As if this is not bad enough, roughly one-third of all bonds now have negative yields, meaning that an investor will get back less than the sum he pays for his bonds. This is due to actions by central banks in Europe and Japan to try to stir up more lending in their economies.

Rock-bottom interest rates have led to a breakdown in a relationship which has held true in financial markets at least until now. That is, stocks and government bonds move in opposite directions as one is considered to be a risk asset, while the other is a safe haven.

So, how does one explain the breakdown in the relationship? There is really no enthusiasm for stocks at the moment because it is difficult to make a case for it at the moment with earnings still on the down-trend.

But the ever-pricier bonds are pushing the yield-hungry investors to buy stocks - and they have been piling into what they regard as defensive plays - Reits and telcos - which have produced reliable stream of cash and are reliable dividend pay-masters.

It is the same story everywhere. In the past two weeks, the big winners here in the local markets have been telcos and Reits and, to a certain extent, banks - on low stock turnover.

Otherwise, these investors have piled into the high-yield bonds and perpetuals issued by companies whose shares they refuse to touch with a barge pole.

Is this a secure basis for investments? No. But it shows how perverted the markets have become in the eight years since the eruption of the global financial crisis and the subsequent financial earthquakes, thanks to the trillions of easy money printed by the various central banks to stir up economic activities.

How will it end? One known unknown is what will happen if the Republican contender, Donald Trump, indeed becomes president after November. This is given his rhetoric from protectionism to regional security and US fiscal policy.

The surprise success of the UK's Leave campaign, despite book-makers and pollsters expecting Britain to stay in the European Union, lends credence to the possibility that Mr Trump may be elected. Indeed, there are some polls which show that he is pulling ahead of Ms Clinton.

While analysts have been focusing on how this may impact the stock and foreign exchange markets, it may be the bond market which bears watching.

Mr Trump's populist policies may mean higher US government spending - and this may drive bond yields up as borrowings increase to fund massive infrastructural spending.

But an antagonistic foreign policy could risk the willingness of foreign central banks to maintain the high levels of reserves they currently hold in US government bonds. For that matter, it may also jeopardise the willingness of foreign investors to hold US corporate bonds.

Then there is the concern raised by his remarks that "I would borrow, knowing that if the economy crashed, you could cut a deal", implying that he would get creditors to accept less than 100 per cent on the dollar for the loans which they have extended to the US government.

US Treasuries are regarded as the ultimate risk-free assets in the global financial system and investors do expect to get 100 per cent of their money back.

Of course, some are hopeful that Mr Trump has not thought things through and is saying the first things that come into his head.

But this is scant consolation for those holding trillions of dollars of US Treasuries, who may now be wondering if their fortunes are going to be driven by the twists and turns of raucous US politics.

The Straits Times

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